All retailers that allow their customers to make payments via credit card have to take fees into account. So, what percentage do credit card companies charge retailers and what should your business plan for if it does a large volume of transactions every month? This article will discuss this in detail, so you can make plans for your business.
Plan Carefully for Credit Card Fees
Most businesses nowadays that want to be successful have to accept credit card payments. This is because many consumers do not walk or drive around with cash. They expect to be able to pay via credit card and will go elsewhere to conduct business if you cannot accommodate them. Your ability to accept credit cards comes at a cost. If you do not estimate the cost to your business, the fees could significantly impact your bottom line.
What percentage do credit card companies charge retailers?
Most businesses pay between 1.5%and 2.9% for every swiped transaction that takes place in their physical store. A swiped transaction is regarded as one that takes place in a brick-and-mortar store, not in an online setting. Since the risk of fraud is higher when transactions take place online, the average fee charged for online transactions is 3.5%.
How much will your business actually pay?
The charges that your business will pay depend on several factors, including the processing method, the credit card network, and whether the customer chooses to use a credit card or debit card. Visa charges between 1.4% and 2.5% for a transaction, while MasterCard charges between 1.5% and 2.6%. If a customer uses Discover or American Express, you could pay anywhere between 1.55% and 3.5%.
If you’re a business that has a large number of customers who use their credit cards, your fees will be different from those paid by a smaller store. Your charges depend on the processor that you choose and several other aspects of your situation.
What takes place behind the scenes?
Every transaction that takes place involves several parties. The card issuer, such as Bank of America, is a major player. They work with the credit card brands, such as Visa, to facilitate the transaction. An interchange fee goes to these banks and credit card companies every time a transaction is done.
The credit card network, such as MasterCard, charges a separate fee from the interchange fee. You will also have to pay this network fee each time a transaction is done. It’s known as the assessment fee and is charged for utilizing their card brand.
Sometimes a company may act as both the issuer of the card and the card network. American Express does this and that’s why fees are typically higher for American Express than other brands. A new pricing model, which is known as OptBlue, brings the fees charged with American Express transactions closer to those charged by other networks.
Your own bank is also involved in each transaction because they need to collect the money from the transaction on your behalf. They are known as the acquirer and they ensure that the money for your product or service is sent to your account. Your acquiring bank sends the information from the transaction through a payment processor, in order to ensure that you’re paid.
A payment processor and merchant account provider perform similar functions. They connect you with the customer’s bank and the merchant. Popular payment processors are Payline Data, Stripe, and Square. If you conduct business online, you will also require a payment gateway, which encrypts the data and sends an authorization request to the card issuer, via the payment processor.
What does your processing fee cover?
Your processing fee covers several administrative costs, including account and software charges. You will also pay transaction fees and one-time incidental fees, like chargebacks. The transaction fees always are the largest part of the total and they are charged every time you do a transaction. Most transaction fees can be divided into two categories., based on whether they take place in person or otherwise
In-person transaction fees are charged when a newspaper vendor has their customers swipe their card or when a tailor or farmer allows their customer to pay in person by using a card. The fees for this type of transaction are between 1.5% and 2.9%, so if a customer purchases goods worth $100 from you, you can expect to pay up to $2.90 as your transaction fee.
If the card is not present, your transaction is thought of as having a higher risk of chargebacks and fraud. For this reason, you will pay between 2.9% and 3.5% on average. Transactions that are keyed in manually are included in these transactions, as invoices. Online purchases of any size are in this category, so if you have an online store, you’ll pay up to $3.50 in transaction fees on a transaction of $100.
Interchange fees are charged by issuing banks and help them to cover the risk. Sometimes these fees are known as wholesale fees. They are non-negotiable, unlike the markup which goes to the credit card processor. Visa and other networks collect this fee and nothing from it go to the payment processor.
Since this fee is charged to cover risk, it is generally lower when the transaction is thought of as having very little risk. If a customer is using a debit card with a pin, this is thought of as having a lower risk than a credit card. Premium Rewards cards and cards which are used for business attract higher interchange fees since those fees are used to help make up the rewards that customers receive.
The brand of the card also affects the interchange fee and American Express cards usually attract a higher fee than Visa or MasterCard. Online purchases have higher fees than those which are charged for in-person transactions. The type of business that you have also affected the fees. For example, a grocery store will pay lower interchange fees than an airline.
Discover, Visa, and other card networks charge assessment fees to cover their operational costs. Assessment fees are fixed and they cannot be reduced through negotiation. The average rates are fairly low but they still take away a small amount of your profit.
A retailer will pay 0.14% for Visa credit card transactions and 0.13$ for Visa credit card transactions. For MasterCard transactions, you will usually be charged 0.1375% but if the transaction is over $1,000, you will be charged 0.1475%. Discover transactions will attract a fee of 0.13%.
Processor Markup Fees
Credit card payment processors charge their own markup on every transaction that they facilitate. This is regarded as a commission that they receive on each transaction. Each credit card processing company charges its own fee, so you can shop around to find the plan that is best for your business.
Of the three fees that you’ll be charged, the markup fee is the one that is usually negotiable. For example, if your business conducts a large number of transactions every day, you can often get discounts on this fee. This fee may consist of a flat fee and a portion that is based on the value of the transaction.
For example, your payment processor may charge a flat fee of $0.10 per transaction plus 0.25%. This means that businesses that do a number of small transactions each day will pay more than a business that does a few high-value transactions daily. This payment model is an interchange-plus model and you will find that it is not ideal for all businesses.
An interchange plus model is the most common option since it is very transparent. Each retailer can easily calculate how much they will pay their processing provider on each transaction. This fee is charged in addition to the standard interchange fee, so you will be able to easily compare the fees charged by different providers.
Flat fees are charged by some companies, no matter how many transactions you do or which credit card companies are involved in the transaction. The same average rates are charged for both debit and credit card transactions if your provider uses the flat fee model.
The flat fee model blends the interchange fees and markup fees, so it is not as easy to determine how much you are being charged for the interchange fee. While it lacks that level of transparency, several retailers like it because it is simple and easy to predict. You always know how much each transaction will cost, even before it takes place.
Subscription or membership plans are also popular since these are good for businesses with high sales volume. You will pay a monthly subscription fee and a small fixed markup fee, along with the interchange fee. Since the processor markup is usually very low, the savings justify the average rates that you pay for membership. Tiered fees are used by a smaller number of retailers. These group transactions like rewards cards transactions into the same tier, based on their similarity.